Coty has released its first-quarter report for the fiscal year 2024, and the results have exceeded expectations. The owner of Lancaster and the licensing partner for Gucci and Hugo Boss fragrances reported a year-on-year net revenue growth of 18% in the first quarter. Additionally, the company now expects FY24 LFL revenue growth of +9-11%, ahead of its recently raised guidance of +8-10%. Coty stated that the revenue growth for high-end products in the first quarter was robust, with a reported increase of 23% and a LFL net revenues increase of 22%. The demand for high-end fragrances has continued to show strong momentum in recent years, with the high-end fragrance market maintaining a growth rate of over 10% in the first quarter. While Coty’s high-end brands have experienced consistent growth, the company also faces the risk of stagnant growth if its licensing brands are reclaimed.
Net revenue contribution from high-end brands accounts for nearly 65%
Coty started the fiscal year 2024 on a strong note, with net revenue of $1,641.4 million for the first three months ending on September 30, representing an 18% year-on-year growth. Coty attributed this performance to the strong demand for high-end fragrances, which saw a revenue increase of 23%. Prestige fragrances grew by 10%, and three series—Burberry Goddess, Gucci Flora, and Burberry Her—entered the top 10 women’s fragrances in the United States for the first time in the company’s history. CEO Nabi mentioned that the sales of Burberry Goddess doubled during this period. Coty also has plans to relaunch Burberry Beauty through the luxury department store Selfridges.
Simultaneously, the revenue from Coty’s high-end brands reached $1,064.7 million, accounting for a significant 64.87% of the total revenue. The contribution of high-end brands to Coty’s performance is becoming increasingly evident.
Since Sue Y. Nabi took over as CEO of Coty in 2020, the company has embarked on a path of premiumization, with the revenue from high-end beauty business growing year by year and accounting for an increasing proportion of Coty’s overall revenue.
In the fiscal year 2020, Coty’s Prestige division achieved revenue of $2.61 billion, accounting for 55.25% of the total revenue. In the fiscal year 2021, the Prestige division generated revenue of $2.72 billion, representing a 4.2% growth compared to the fiscal year 2020, and accounting for 58.77% of the total revenue. In the fiscal year 2022, the Prestige division of Coty achieved revenue of $3.27 billion, a 20.22% increase compared to the fiscal year 2021, and accounted for over 60% of the total revenue, reaching 61.61%. In the fiscal year 2023, the Prestige division of Coty achieved revenue of $3.42 billion, accounting for 61.59% of the total revenue. In the first quarter of the fiscal year 2024, the proportion of high-end brands continued to rise, reaching 64.87%.
Coty stated that the boost in sales from high-end brands such as Burberry Goddess, Burberry Her, and Gucci Flora led the company to forecast a revenue growth of 9% to 11% for the fiscal year 2024, exceeding the recently raised expectation of 8% to 10%. Coty continues to target adjusted earnings per share between $0.44 and $0.47 for the full year, representing a growth of up to 25%.
Considering the outstanding performance of its Prestige division, Coty plans to adjust its products to adapt to market structural changes, particularly in the fragrance sector.
Coty CEO Sue Y. Nabi stated, “In this context, we continue to develop the fragrance category and elevate our business through our iconic product portfolio and leading products such as Burberry Hero and Her, Gucci Flora Gorgeous Jasmine and Gorgeous Gardenia, Boss Bottled Parfum, and Chloe Atelier des Fleurs.”
In May of this year, Coty announced its plans to launch a new high-end fragrance collection, Infiniment Coty Paris, in 2024. This collection is positioned to be to fragrances what the company’s ultra-prestige brand, Orveda, is to skincare. The project is described as Coty’s “most ambitious and premium fragrance project to date.”
Coty also mentioned the prospects of the Chinese beauty market, estimating that China accounts for 13% of global beauty product sales and 4% of Coty’s total sales. It indicates that China is rapidly becoming a major fragrance market. The sales of Coty’s high-end fragrances in China have grown by 66% compared to three years ago, outpacing the growth rate of the high-end beauty market in China by 1.5 times.
With Coty’s successful listing in Paris, Sue Y. Nabi stated that European investors are also interested in premium cosmetics and fragrances. The listing in Paris can enrich the company’s investor base and contribute to its long-term development.
Coty’s path to premiumization
Coty, like other international beauty giants, initially relied on extensive acquisitions to expand its influence. Since 2010, Coty has embarked on a series of major acquisitions to build its brand portfolio. In November 2010, Coty acquired beauty company Philosophy and nail care product manufacturer OPI Products from the Carlyle Group. In January 2011, Coty acquired Chinese domestic brand TJoy for 2.4 billion RMB. In 2014, Coty Group acquired the Chanel-owned Bourjois cosmetics brand.
In 2015, Coty made a significant investment by acquiring Procter & Gamble’s perfume, hair care, and cosmetics divisions, encompassing a total of 43 brands, for a total of $12.5 billion. This transaction became the largest acquisition in the beauty industry in nearly 20 years. The acquisition granted Coty the fragrance licenses for luxury brands such as Gucci, Hugo Boss, and Dolce & Gabbana. In terms of cosmetics, Coty added brands like Cover Girl and Max Factor to its portfolio, positioning itself among the top players in the global beauty industry. In October 2016, Coty completed the acquisition with Procter & Gamble, and the acquired brands were consolidated into Coty’s financial report for 2017.
However, it became apparent that extensive acquisitions were not an effective strategy for Coty to improve performance and influence. When the acquired Procter & Gamble brands were consolidated into Coty’s financial report in 2017, Coty achieved a revenue of $7.65 billion, a 75.9% increase compared to the $435 million in 2016. However, it incurred a loss of nearly $400 million, whereas it had a profit of $179 million in 2016.
Since 2017, Coty has faced mounting net debt resulting from the acquisitions, as well as supply chain imbalances in the face of a large brand portfolio. From 2017 to 2021, Coty’s revenue declined for six consecutive years, with a significant loss of $3.77 billion in the fiscal year 2019. During this period, Coty’s net debt has steadily increased from $2.056 billion in the fiscal year 2014 to $7.405 billion currently, representing a growth of over 260%.
In 2020, the appointment of Sue Y. Nabi as CEO brought a turning point for Coty. Sue Y. Nabi began her career at L’Oréal in 1993, where she became the youngest-ever CEO of L’Oréal Paris. In 2009, she joined Lancôme and led the brand to achieve double-digit growth within three years, reaching a record turnover of 320 million euros.
As a global beauty company, Coty previously focused primarily on mass-market products. However, in order to meet consumer demand for premium products and reverse the company’s performance, under the leadership of the new CEO, Coty decided to shift towards the high-end market and invest in the development of luxury brands and product lines.
Coty pursued its path to premiumization through a series of strategic initiatives. Firstly, they carried out a brand portfolio adjustment, divesting some mass-market brands. Under Sue Y. Nabi’s leadership, Coty restructured its business and streamlined some of its brands, consolidating its three divisions of Mass Beauty, Professional Beauty, and Prestige into two divisions: Consumer Beauty and Prestige, with a focus on high-end brands.
In the fiscal year 2020 financial report, Coty stated that it had over 75 brands, with 53 major brands listed in the report. However, in the fiscal year 2023 financial report, the major brands had been streamlined to 33, with a significant emphasis on luxury brands. These brands include Burberry, Gucci, Hugo Boss, Lancaster, Orveda, and others. The consolidation of brands has allowed Coty to concentrate its resources on developing high-end brands.
Secondly, Coty actively sought collaborations with renowned designers and fashion brands to launch unique co-branded collections and limited-edition products, enhancing the brand’s high-end image and appeal. Notable personalities and fashion designers Coty collaborated with include fashion designer Marc Jacobs, Jil Sander, Alexander McQueen, and football superstar David Beckham.
Furthermore, Coty increased investment in research and development (R&D) and innovation, continuously introducing high-quality and innovative products. For example, Orveda, which made its debut at the 6th China International Import Expo, combines cutting-edge science with natural extracts through highly concentrated patented biotechnology. Orveda helps address skin concerns and adapt to new challenges. Additionally, Coty’s latest research achievement, the INFINIMENT COTY PARIS fragrance collection, which blends aesthetics, science, and art, showcases Coty’s latest innovations and R&D efforts.
Coty’s high-end brands and product lines have gained recognition and favor among consumers, achieving strong sales performance in the luxury market. Coty continues to strive for brand image enhancement and product quality improvement to meet the increasing consumer demand for high-quality and unique experiences.
Through brand portfolio adjustments, collaborations with renowned designers and brands, increased R&D and innovation investments, Coty has successfully embarked on the path of premiumization and achieved positive results in the luxury market. The company’s financial performance has shown signs of improvement. Data shows that Coty’s sales revenue from high-end perfumes grew by 23% in the first quarter, with prestige fragrances growing by 10%. Three specific lines—Burberry Goddess, Gucci Flora, and Burberry Her—entered the top 10 women’s fragrances in the United States for the first time in the company’s history.
After one year under Sue Y. Nabi’s leadership, Coty’s downward trend slowed down in the fiscal year 2021. In the 2021 fiscal year, Coty’s revenue was $4.63 billion, a decrease of only 1.86% compared to 2020, marking the lowest decline in five years. The company’s loss also narrowed from $1 billion in 2020 to $205 million in 2021. In the 2022 fiscal year, Coty achieved its first net revenue growth in six years, with revenue reaching $5.304 billion, a 14.57% increase compared to 2021. Moreover, the company turn to profit for the first time in six years, with a net income of $268 million in the 2022 fiscal year. This demonstrates the significant impact of Coty’s path to premiumization on the company.
Hidden risks of excessive reliance on licensed brands
Since Coty began streamlining its operations, its high-end beauty business has become its main growth driver. As of the 2023 fiscal year, Coty’s high-end beauty segment has accounted for over 60% of its total net revenue for two consecutive years. Sales of high-end fragrances represent 56% of the company’s total sales, while consumer beauty and body care products account for 24% and 7% respectively. Due to the positive outlook for the high-end fragrance business, Coty aims for a low growth rate of around 50% in the high-end fragrance segment by the 2026 fiscal year.
However, the significant proportion of Coty’s high-end beauty business also brings challenges and issues. According to the latest annual report for the 2023 fiscal year, out of its 33 major brands, 17 are high-end beauty brands, but only four are owned by Coty. The growth of Coty’s high-end beauty business heavily relies on licensed brands such as Burberry, Hugo Boss, and Gucci.
In recent years, luxury brands have shown increased interest in high-end cosmetics, particularly fragrances. In February of this year, LVMH established a beauty division and reportedly acquired fragrance brand Creed for 3.5 billion euros by the end of June. Additionally, another luxury company established the Laboratoire de Haute Parfumerie et Beauté in early September to elevate the standards of its beauty business, with a focus on expanding its portfolio of fragrance brands. The perfume brands under LVMH’s umbrella include Cartier, Van Cleef & Arpels, Chloé, Dunhill, Alaïa, and Montblanc. These brands have licensing partnerships with Interparfums and Coty. This move is also seen as LVMH reclaiming operational rights for some of the brands. The stock price of its main fragrance licensing partner, Interparfums, fell 9.4% on the same day.
Overall, Coty has placed significant emphasis on its high-end beauty business and achieved some success. However, its overreliance on licensed brands may pose risks. Additionally, the increasing interest of luxury brands in the beauty market presents challenges for Coty.
